A Timeline for Economic Recovery

FOR ALL OF THE UNCERTAINTY related to the coronavirus and the economy, a path to eventual recovery is becoming clearer, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. But considering the impact to people’s health, as well as to jobs, businesses and investor confidence, the process won’t be easy or quick, he cautions.

Everything depends on a breakthrough in a pandemic still gripping the United States and the world. “Science is what gets us back to the ‘new normal’,” Hyzy says. Assuming progress on that front, a new Chief Investment Office (CIO) report, “Over the Bridge to the Other Side,” outlines how a gradual but steady progression back to economic strength and reduced market volatility could unfold over the next couple of years. The report maps out the following potential timeline.

Over the Bridge (2^nd and 3^rd Quarters of 2020)
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed in late March, provided $2 trillion to help households, small businesses, state and local governments and corporations weather the crisis. In addition, stimulus programs by the Federal Reserve have pumped about $1.6 trillion into financial markets in the past month, and the total could reach $2 trillion—or 10% of U.S. GDP. “Policy makers are likely to consider additional stimulus measures as necessary to boost recovery,” Hyzy says.

To the Other Side (4^th Quarter 2020 into 2021)
While financial markets will likely recover relatively quickly once the stimulus takes full effect, the wider economy will take more time, Hyzy believes. After the steep plunge and bottoming out, a “U-shaped” recovery should begin as consumer confidence slowly returns. “We’re forecasting real economic growth of 30% for the U.S. in the 4^th quarter of this year and 6.1% in 2021,” he says.

Pent-up Demand Boosts Economic Growth (2021-2022)
As virus treatments improve and progress towards a vaccine possibly accelerates, economic growth should gather momentum. “When people gradually become less tentative about engaging socially, we could see a surge in pent-up demand next year and into 2022,” Hyzy says.

The New Frontier (2022-2025)
Even a full recovery won’t bring back the same economy or the same world, Hyzy notes. “New behaviors will cement themselves into daily consumer and business life and new industries will be born,” he says. In years to come, investors may find opportunities in technological innovation, from automation and robotics to e-sports, e-entertainment and more. We’ll also likely see a rise in health care spending around the world and redrawn global supply chains, especially for pharmaceuticals, Hyzy says.

Risks That Could Alter the Journey
While every economic crisis contains uncertainties, the coronavirus represents new and uncharted territory. “Never before have major economies been deliberately shut down to bring a health crisis to manageable proportions,” Hyzy says. If the “curve” of new cases steepens rather than flattens, consumer confidence remains depressed, or the battered energy market helps generate a credit crisis (among other risks), the recovery could take longer than expected.

What Can Investors Consider?
As the markets approach bottom, investors can consider rebalancing affected portfolios. This may include using “dollar cost averaging”—which can reduce the effects of volatility by stretching asset purchases over time. With volatility expected to continue for a while, investors may also want to consider active rather than passive portfolio management¹, since active managers seek to outperform benchmarks, Hyzy says.

Diversifying portfolios across assets classes and within individual asset classes remains a priority. Hyzy recommends large, high-quality U.S. companies. Given extremely low interest rates, investors may find better yields through dividend-paying stocks rather than bonds. Yet bonds remain important to mitigate risk in a portfolio, he adds.

For more information, read the CIO report “Over the Bridge to the Other Side,” and tune in to the Daily CIO Audiocast at 2 P.M. (ET) every weekday afternoon.